You Can't End Poverty without Cutting Taxes

Recent tax proposals have let loose the dogs of economic war. While debate has raged over the impact of tax cuts on growth and revenue, the moral case for low taxation remains largely neglected.

Critics have predictably launched an all-out assault on the idea that taxpayers should keep more of their own money. One op-ed bemoans the “alchemistic belief that huge tax cuts can pay for themselves by unleashing faster economic growth.” Another decries the alleged lack of financing to “pay” for tax cuts, while further deriding them as mere “benefits for the wealthy.” Others have abandoned evidence entirely and resorted to personal attack. “When power meets greed, you can bet, the schmucks in the red hats will pay,” snarks one such commentator.

Tax reform advocates have rightly refuted these tired and often evidence-free attacks. For instance, hard facts demolish the farce that tax cuts uniquely benefit the rich. In percentage terms, tax reductions have historically tilted toward lower earners. As Thomas Sowell has pointed out, the slogan “tax cuts for the rich” should be labeled “tax lies for the gullible.” Furthermore, talk of tax cuts “paying for themselves” is disingenuous.

A lower tax rate may mean lower revenue, but less revenue is not the equivalent of government expenditure. Government spending must be “paid for,” but taking less of a worker’s income “costs” nothing, as the income earner—not Uncle Sam—has the right to the fruit of his labor. To argue otherwise means income first belongs to the state, not the individual. Remarkable that a country whose founding creed was “no taxation without representation” would lose sight of such an elementary truth.

Moreover, whether lower taxes translate to higher revenue depends on the tax cut in question, but what is clear is that heaps of evidence—including a study by former Obama administration economist Christina Romer—show that lower taxes boost economic growth.

The Case for Lower Taxes

Important as these matters are, however, the case for reduced taxation is also compelled by moral considerations.

Every generation of Americans has understood that taxation is a fact of life. Ben Franklin famously remarked that in life “nothing can be said to be certain, except death and taxes.” However, our founders worked to keep taxes limited and uniform. “[A]ll duties, imposts and excises shall be uniform throughout the United States,” reads the U.S. Constitution. [emphasis added] That is why they not only rejected progressive income taxation, but income taxation entirely. The early republic instead applied taxes primarily to goods, which provided maximum personal choice (to avoid the tax one could avoid purchasing the product).

This vision generally held until the early 20th century, although there were two brief experiments with an income tax prior to that period. The first involved income taxation as high as ten percent during the civil war, which was repealed shortly thereafter.

The second was in 1894 when Congress passed an income tax that applied to the top two percent of wealth holders. However, it was quickly struck down by the Supreme Court as unconstitutional. As historian Burt Folsom notes, “At age 77, [Stephen] Field,” who was a Supreme Court justice at the time, “not only repudiated Congress’s actions, he also penned a prophecy. A small progressive tax, he predicted, ‘will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich.’”

That prophecy became reality in 1913, when a constitutional amendment cleared the way for progressive income taxation. Beginning at a modest 7 percent, the top rate didn’t remain there for long. It quickly rose to 24 percent, before jumping to 63 percent under Herbert Hoover. It reached 90 percent under FDR, who proposed raising it to a breathtaking 99.5 percent in 1941. Thankfully, his proposal was rejected and the top rate declined in subsequent decades. Today it stands at 39.6 percent.

But there are at least three moral reasons for lower taxation.

The Morality of Tax Cuts

First, bigger government means less individual generosity. The more of our money government consumes, the less we give to private charities and local community members in need. Jonathan Gruber, an economist from MIT, conducted a study of the New Deal government in the 1930s, and concluded that private charity spending “fell by 30% in response to the New Deal, and that government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939.” Another study of charitable giving from 1965 to 2005 “showed that increases in state and local government welfare and education spending do reduce charitable giving.”

Second, benevolence with other people’s money is no virtue.Advocating higher taxes on others to pay for government programs may make us feel good, but virtue requires self-sacrifice and personal generosity. Relying on the state gives us the luxury of feeling good about ourselves without having to do good.

Third, government aid is often less effective at lifting the destitute. Private charities make distinctions between people who truly need help and those who do not, as well as between those who need material assistance and those who need moral refocus, personal counseling, relationship repair or spiritual commitment. Government, no matter how well-intentioned, does not and cannot make such distinctions.

The State Perpetuates Poverty

In his ground-breaking book, Losing Ground, Charles Murray documents poverty steadily declining through the 1940s, 50s and 60s, before government’s “War on Poverty.” Afterward, however, the trend reversed. According to government’s own figures, the poverty rate has failed to drop after 50 years and $22 trillion in anti-poverty spending.

As social scientist Marvin Olasky notes, the failure is attributable to government’s emphasis on “entitlement rather than need.” As the state swelled, even “small efforts at categorization and discernment were seen as plots to blame the poor rather than the socioeconomic system that trapped them,” Olasky notes. “‘Freedom’ came to mean governmental support rather than the opportunity to work and move up the employment ladder.”

“I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

There is no compassion in keeping the downtrodden impoverished, nor is it good for the economy. These realizations led Milton Friedman to proudly proclaim: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.” Reasons abound and the possibility exists. We simply need to make the case.

But critics are savaging this idea, implying that “deep cuts” will hurt the quality of care. Indeed, some of them are even engaging in poisonous rhetoric about people dying because of cutbacks.

There’s one small problem with the argument, however. Nobody is proposing to cut Medicaid. Republicans are merely proposing to limit annual spending increases. Yet this counts as a “cut” in the upside-down world of Washington budgeting.

The Washington Post contributes to innumeracy with a column explicitly designed to argue that the program is being cut.

…the Senate proposal includes significant cuts to Medaid spending…the Senate bill is more reliant on Medicaid cuts than even the House bill…spending on the program would decline in 2026 by 26 percent…That’s a decrease of over $770 billion on Medicaid over the next 10 years. …By 2026, the federal government would cut 1 of every 4 dollars it spends on Medicaid.

An article in the New York Times has a remarkably inaccurate headline, which presumably isn’t the fault of reporters. Though the story has its share of dishonest rhetoric, especially in the first few paragraphs.

Senate Republicans…took a major step…, unveiling a bill to make deep cuts in Medicaid… The Senate measure…would also slice billions of dollars from Medicaid, a program that serves one in five Americans… The Senate bill would also cap overall federal spending on Medicaid: States would receive a per-beneficiary allotment of money. …State officials and health policy experts predict that many people would be dropped from Medicaid because states would not fill the fiscal hole left by the loss of federal money.

“Loss of federal money”?

I’d like to lose some money using that math. Here’s a chart showing the truth. The data come directly from the Congressional Budget Office.

At the risk of pointing out the obvious, it’s not a cut if spending rises from $393 billion to $464 billion.

Federal outlays on the program will climb by about 2 percent annually.

By the way, it’s perfectly fair for opponents to say that they want the program to grow faster in order to achieve different goals.

But they should be honest with numbers.

Now that we’ve addressed math, let’s close with a bit of policy.

The Wall Street Journal recently opined on the important goal of giving state policymakers the power and responsibility to manage the program. The bottom line is that recent waivers have been highly successful.

…center-right and even liberal states have spent more than a decade improving a program originally meant for poor women and children and the disabled. Even as ObamaCare changed Medicaid and exploded enrollment, these reforms are working… The modern era of Medicaid reform began in 2007, when Governor Mitch Daniels signed the Healthy Indiana Plan that introduced consumer-directed insurance options, including Health Savings Accounts (HSAs). Two years later, Rhode Island Governor Donald Carcieri applied for a Medicaid block grant that gives states a fixed sum of money in return for Washington’s regulatory forbearance. Both programs were designed to improve the incentives to manage costs and increase upward mobility so fewer people need Medicaid. Over the first three years, the Rhode Island waiver saved some $100 million in local funds and overall spending fell about $3 billion below the $12 billion cap. The fixed federal spending limit encouraged the state to innovate, such as reducing hospital admissions for chronic diseases or transitioning the frail elderly to community care from nursing homes. The waiver has continued to pay dividends under Democratic Governor Gina Raimondo. …This reform honor roll could continue: the 21 states that have moved more than 75% of all beneficiaries to managed care, Colorado’s pediatric “medical homes” program, Texas’s Medicaid waiver to devolve control to localities from the Austin bureaucracy.

Piles of studies have shown that people on Medicaid have health outcomes that are no better, and often worse, than those with no insurance at all. …authors of the Oregon study published their updated, two-year results, finding that Medicaid “generated no significant improvement in measured physical health outcomes.” The result calls into question the $450 billion a year we spend on Medicaid… And all of that, despite the fact that the study had many biasing factors working in Medicaid’s favor: most notably, the fact that Oregon’s Medicaid program pays doctors better; and also that the Medicaid enrollees were sicker, and therefore more likely to benefit from medical care than the control arm.

In other words, I was understating things when I wrote above that there was “one small problem” with the left’s assertion about Medicaid cuts hurting people.

Yes, the fact that there are no actual cuts is a problem with that argument. But the second problem with the left’s argument is that Medicaid doesn’t seem to have any effect on health outcomes. So if Republicans actually did cut the program, it’s unclear how anybody would suffer (other than the fraudsters who bilk the program).

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

Without the State, Who Will Handcuff Teens for Selling Water Bottles?

Tourists taking a stroll around the national monuments this past weekend might have wondered what horrible crime was committed by a group of black teenagers sitting handcuffed and detained on the sidewalk. But while imaginations may run wild, the truth of the matter is extremely tame; the only offense these teens were guilty of was selling bottled water without first asking the government for permission.

If this seems like an overreaction on the part of law enforcement, that is because it absolutely is. However, this over-enforcement has become all too common when it comes to youthful attempts at entrepreneurship. During the hot summer months when school-aged children are liberated from their oppressive classrooms, many have discovered the wonders of capitalism only to be shut down by local authorities.

Just a week prior to this appalling scene, a similar instance occurred in the neighboring city of Baltimore, Maryland. A group of young black children, still donning their school uniforms from earlier in the day, were selling snow cones in their community, until police shut them down for not obtaining the proper permits. While these young children were fortunate enough to not have been placed in handcuffs, this national crackdown on child-run businesses is having a far worse impact on the communities where the self-sustaining entrepreneurial spirit is needed the most.

Breaking the Cycle

In the District of Columbia, 26 percent of its black residents are below the national poverty line. Equally dismal, for those black residents living in Baltimore, Maryland, 27.6 percent are considered to be living below the the poverty line. And yet, rather than encouraging these communities to become self-sufficient, the state is penalizing those who have the most to gain from entrepreneurial endeavors.

Whether it’s selling lemonade on a neighborhood street corner or, like the young men detained in DC this weekend, selling cold bottles of water to overheated tourists, local law enforcement has cracked down and and penalized minors who would dare start a business without first obtaining a government license. However, in other areas, specifically more affluent communities where the level of those living below the poverty line are not quite as high as Baltimore and Washington, DC, you will rarely find young entrepreneurs placed in handcuffs for making a few extra dollars.

Perhaps, this is what makes the scene on the national mall this weekend so horrific. Officers on the scene claimed that this extreme measure taken against these teens was done in order to ensure police safety, exemplifying yet again how members of lower socioeconomic communities are constantly facing state obstacles.

Not only are these licensing laws not doing anything substantial to actually protect consumers, they are disproportionately impacting the most economically vulnerable communities in negative ways. And as a result, the vicious cycle of poverty becomes incredibly difficult to escape.

For most of these young entrepreneurs, it never once occurred to them that they would even need such a thing before engaging in the economy. And who can blame them? In addition to these permit requirements being absolutely meaningless, the public school system has done nothing to foster an environment where young Americans are encouraged to go out be active participants in the economy.

Imprisoned by Compulsory Education

Compulsory education has mandated that adolescents must sit in a desk for six to eight hours a day, caged away from the rest of society and isolated from critical thought or practical life skills. Instead of teaching students precepts of the free market and allowing them to actually experience capitalism in action, they are kept in a state of dependency until the day they turn 18. Then, after this magical government-sanctioned right of passage has occurred, we throw them out into the real world and expect them to know how to find a job and make money.

Truthfully, it is amazing that these young people even want to get a job and make money after the system has crushed their spirits for 13 years. But in cities with higher levels of poverty, this becomes an even greater problem, especially when college is not a desirable or feasible option. The ability to create a business or learn a practical skill that can be used to cater to market demand is profitable for those of all socioeconomic backgrounds, but especially those eager to break the cycle of poverty.

But for those in more economically vulnerable communities, the system disproportionately impacts their ability to succeed as independent adults. Instead of encouraging their entrepreneurial spirit, we teach them useless skills and prevent them from opting out of school in favor of apprenticeships or other specialized courses of learning.

In fact, the system not only prohibits these students from looking for alternatives to K-12 education, it criminalizes those who stop attending just as it criminalizes those who do not ask the government for permission before starting a business.

This was unfortunately exemplified this weekend in Washington DC. the boys were were detained were merely trying to be entrepreneurial. Understanding that tourist season and the summer heat create an enormous demand for cold water, these teens spent their weekend creating value. They weren’t out getting into trouble or committing offenses, they were trying to be financially self-sufficient and instead found themselves handcuffed like common criminals.

The Market Provides

The market is a liberator of all people, regardless of their circumstances. It exists to help all those who are willing to utilize it well. When individuals of all ages are allowed to take full advantage of everything free market capitalism has to offer, they are able to better their circumstances, innovate their lives, and rise out of their situations.

When the state is continually building and reinforcing barriers that are put in the way of those who are already facing poverty and other unfortunate circumstances, it keeps them from achieving their full potential and becoming successful individuals. If the state is serious about trying to help those from the most vulnerable communities, the simple solution would be to stay out of the way.

Fortunately for the DC teens, the media they garnered as a result of being handcuffed caught the attention of Raymond Bell. Several years, Bell started the H.O.P.E (Helping Other People Excel) Project whose mission is “an information technology ("I.T.") training program dedicated to providing technical training and development for young adults.”

After reaching out to two of the four young men in the picture, Bell was able to get them involved in his organization and they will soon be starting their new summer jobs in the tech industry. “I’m an entrepreneur myself,” Bell said, “and I love seeing young people having an interest in working for themselves.” Bell says he plans on reaching out to the other boys as well, but already, his organization has done more to help than the government ever could.

…was shocked with delight at the shower in Brazil. …step into the shower and you have a glorious capitalist experience. Hot water, really hot, pours down on you like a mighty and unending waterfall… At least the socialists in Brazil knew better than to destroy such an essential of civilized life.

I know what he’s talking about.

I’m in a hotel (not in Brazil), and my shower this morning was a tedious experience because the water flow was so anemic.

Why would a hotel not want customers to have an enjoyable and quick shower?

The answer is government.

…here we’ve forgotten. We have long lived with regulated showers, plugged up with a stopper imposed by government controls imposed in 1992. There was no public announcement. It just happened gradually. After a few years, you couldn’t buy a decent shower head. They called it a flow restrictor and said it would increase efficiency. By efficiency, the government means “doesn’t work as well as it used to.” …You can see the evidence of the bureaucrat in your shower if you pull off the showerhead and look inside. It has all this complicated stuff inside, whereas it should just be an open hole, you know, so the water could get through. The flow stopper is mandated by the federal government.

The problem isn’t just the water coming out of the showerhead. It’s the water coming into your home.

It’s not just about the showerhead. The water pressure in our homes and apartments has been gradually getting worse for two decades, thanks to EPA mandates on state and local governments. This has meant that even with a good showerhead, the shower is not as good as it might be. It also means that less water is running through our pipes, causing lines to clog and homes to stink just slightly like the sewer. This problem is much more difficult to fix, especially because plumbers are forbidden by law from hacking your water pressure.

Bureaucratic Design

So why are politicians and bureaucrats imposing these rules?

Ostensibly for purposes of conservation.

…what about the need to conserve water? Well, the Department of the Interior says that domestic water use, which includes even the water you use on your lawn and flower beds, constitutes a mere 2% of the total, so this unrelenting misery spread by government regulations makes hardly a dent in the whole. In any case, what is the point of some vague sense of “conserving” when the whole purpose of modern appliances and indoor plumbing is to improve our lives and sanitation? (Free societies have a method for knowing how much of something to use or not use; it is called the signaling system of prices.)

Jeffrey is right. If there really is a water shortage (as there sometimes is in parts of the country and world), then prices are the best way of encouraging conservation.

Now let’s dig in the archives of the Wall Street Journal for a 2010 column on the showerhead issue.

Apparently bureaucrats are irked that builders and consumers used multiple showerheads to boost the quality of their daily showers.

Regulators are going after some of the luxury shower fixtures that took off in the housing boom. Many have multiple nozzles, cost thousands of dollars and emit as many as 12 gallons of water a minute. In May, the DOE stunned the plumbing-products industry when it said it would adopt a strict definition of the term “showerhead”…

A 1992 federal law says a showerhead can deliver no more than 2.5 gallons per minute at a flowing water pressure of 80 pounds per square inch. For years, the term “showerhead” in federal regulations was understood by many manufacturers to mean a device that directs water onto a bather. Each nozzle in a shower was considered separate and in compliance if it delivered no more than the 2.5-gallon maximum.

But in May, the DOE said a “showerhead” may incorporate “one or more sprays, nozzles or openings.” Under the new interpretation, all nozzles would count as a single showerhead and be deemed noncompliant if, taken together, they exceed the 2.5 gallons-a-minute maximum.

You've Got to Be Kidding

And here’s something that’s both amusing and depressing.

The regulations are so crazy that an entrepreneur didn’t think they were real.

Altmans Products, a U.S. unit of Grupo Helvex of Mexico City, says it got a letter from the DOE in January and has stopped selling several popular models, including the Shower Rose, which delivers 12 gallons of water a minute. Pedro Mier, the firm’s vice president, says his customers “just like to feel they’re getting a lot of water.” Until getting the DOE letter, his firm didn’t know U.S. law limited showerhead water usage, Mr. Mier says. “At first, I thought it was a scam.”

Unsurprisingly, California is “leading” the way. Here are some passages from an article in the L.A. Times from almost two years ago.

The flow of water from showerheads and bathroom faucets in California will be sharply reduced under strict new limits approved Wednesday by the state Energy Commission. Current rules, established in 1994 at the federal level, allow a maximum flow of 2.5 gallons per minute from a shower head. Effective next July, the limit will fall to 2.0 gallons per minute and will be reduced again in July 2018, to 1.8 gallons, giving California the toughest standard of any U.S. state.

Though “toughest standard” is the wrong way to describe what’s happening. It’s actually the “worst shower” of any state.

P.S. I forget the quality of shower I experienced in South Korea, but I was very impressed (see postscript) by the toilet.

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

Monday, June 26, 2017

Ken Cooper runs a small business out of his home. Unfortunately Ken’s business was not so small that it avoided the notice of a patent troll.

Ken has been writing code since 1973. His life in programming has ranged from small personal projects to founding a software company that was acquired by Microsoft. Today he runs a company called Coopercode. The company’s main project is a mobile scavenger hunt app for the iPhone and iPad called Klikaklu. Ken created the app to do scavenger hunts with his kids. It ended up being featured by Apple as a ‘New and Notable’ app and became popular with teachers. The app has been used at conferences, college orientations, and institutions like the Smithsonian and the National Gallery of Art. What began as a hobby project turned into a real business.

But Ken’s new business hit a roadblock. On January 6, 2017, a patent troll called Locality Leap, LLC, sued Coopercode alleging that Klikaklu infringed U.S. Patent No. 6,320,495 (the ’495 patent), entitled “Treasure Hunt Game Utilizing GPS Equipped Wireless Communications Devices.” The patent claimed a method of playing a game that involves receiving a message, generating a message, and then having a player move to a location based on those messages. It didn’t involve any new technology. Rather, it suggested using messaging and GPS technology to assist with the age-old pastime of treasure hunts.

Ken was stunned by Locality Leap’s patent. He’d had some experience with the patent system from his time at Microsoft. In fact, Ken is a named inventor on six patents. But his first thought on reading the ‘495 patent was: “Wow, you can patent that?” The patent seemed trivial. All it did was combine things Locality Leap didn’t invent – like GPS and wireless messaging – with an ancient game.

Even though the patent seemed frivolous, Ken faced the prospect of ruinous costs from the litigation. Locality Leap filed its suit in the Eastern District of Texas. That made no sense to Ken. Coopercode is based in Washington State and Locality Leap is incorporated in California. Then Ken learned that the Texas forum had a reputation as being both patent-friendly and expensive for defendants. Instead of spending time growing his business (with marketing or creating an Android version of the app), all of Ken’s time was sucked into the litigation. Ken soon realized that the case might force him to close his business entirely.

Fortunately, thanks to Alice v. CLS Bank, Ken was able to fight back. Locality Leap’s patent was likely invalid under Alice because it simply applied well-known computer functionality to an old practice. Since Alice can be raised early in a case on a motion to dismiss, it also offered Coopercode a way to defend itself without going through ruinous discovery and trial. As Ken described it, Alice was “manna from heaven.”

With EFF’s help, Ken was able to find an experienced patent litigator who took the case for a reduced fee. Ken’s lawyer wrote to Locality Leap explaining that its patent claims were invalid under Alice and also invalid as obvious. She explained that if Locality Leap didn’t dismiss the case voluntarily, Coopercode would file a motion to dismiss raising Alice and would also seek attorney’s fees.

Facing a defendant willing to fight back, Locality Leap folded completely. It dismissed its claims with prejudice and Ken did not have to pay any money. Instead of closing his company he could return to it full time and work on growing the business. Without Alice, he likely would have faced a very different result.

Senator Chris Coons introduced a bill this week called the STRONGER Patents Act [PDF]. The bill contains many terrible ideas. It would gut inter partes review (a valuable tool for challenging bad patents). It would overturn the Supreme Court’s decision in eBay v. Mercexchange (thereby allowing patent trolls to get injunctions to shut down productive companies, even though the patent infringed is only on a tiny piece of the larger product). Perhaps most strikingly, the bill includes a provision that would discourage companies from doing research and development in the United States. The STRONGER Patents Act shows how far the certain patent owners are willing to go to serve their narrow interests at the expense of everyone else.

The general rule in patent law is that each country has its own patent system. This means that companies can only be found liable for infringing a U.S. patent for manufacturing or sales that occur within the United States. The Supreme Court has issued a number of sensible decisions affirming this rule. Senator Coons’ bill would upend this principle by making companies liable for foreign sales whenever they conducted the research and development for that product in the U.S.

Section 108(3)(A) of the bill says:

Whoever, without authority, supplies or causes to be supplied in or from the United States a design for a product embodying a patented invention in such manner as to actively induce the making of that product outside the United States in a manner that would infringe the patent if made in the United States, shall be liable as an infringer.

In plain English, this means that if you design a product in the U.S., you can be sued for sales around the world. Worse, a separate provision the bill would have this rule apply even if you independently invented your product, and had no idea you were infringing a patent.

To see the impact of this provision, we can consider how it would apply to fabless semiconductor companies based in Austin, Texas or Austria. The Austin company designs chips in Texas then has them manufactured in Taiwan and sold around the world. The Austrian company designs chips in Salzburg then has them manufactured in Taiwan and sold around the world. If these chips are found to infringe a U.S. patent, the Austin company would be liable for all of its global sales. The Austrian company, however, could be found liable only for its U.S. sales. In this way, Coons’ proposal punishes the Austin company for investing in research and development in the United States.

You might think that the STRONGER Patents Act balances this big disincentive to innovate in the U.S. by making U.S. patents stronger. But that is wrong. You do not need to perform research and development in the U.S. to get a U.S. patent. As long as you meet the criteria for getting a patent, it doesn’t matter if your laboratory is in Austin or Austria. Indeed, in recent years more than half of issued U.S. patents were of foreign origin.

Under Senator Coons’ proposal, the most sensible business model is to do research outside the United States. Foreign companies will have their overseas sales protected. Yet they can still get U.S. patents and use those patents to attack the global sales of U.S.-based companies. As Josh Landau suggests at Patent Progress, it’s hard to think of a more effective way to use patent policy to convince companies to shift their investment in research and development overseas.

Patent owners often insist, without evidence, that “stronger” patents will always mean more innovation. The STONGER Patents Act shows why that is not true. The bill would “strengthen” the U.S. patent system in ways that actively discourages doing research and development here. It makes this choice solely to benefit patent owners. We hope that Congress rejects the terrible ideas in the STRONGER Patents Act and turns to patent reform that would actually promote innovation.

Friday, June 23, 2017

Colorado Challenges Police to Serve and Protect, Not Fine and Collect

Colorado was ahead of the national curve when it legalized sales of recreational marijuana in 2012. Now it is yet again on the verge of being the standard bearer for another set of issues that are dear to the hearts of liberty movement: challenging law enforcement protocol that is more interested in generating revenue through onerous fines for victimless crimes than revenue raising.

The man behind this effort is a Colorado resident, entrepreneur, and political activist. Based in Colorado Springs, Steve Kerbel is a former CEO and Libertarian Party presidential candidate. An activist at heart, Kerbel has never backed down from a fight with a government entity, including a legal fight with his state’s securities office.

“When government unfairly shakes down business and private citizens, the only winner is government,” Kerbel states. “The people lose every time.”

Ahead of the midterm elections, Kerbel is preparing to launch “Stop the Shakedowns”— a campaign which seeks to introduce a unique statewide measure in Colorado that will likely set off alarms in the law enforcement community. If successful, his efforts would create a template that can be used in other states.

A Charitable Alternative

The ballot measure is creative and straightforward: all fines issued against Coloradans can be satisfied with donating to a registered charity of their choice.

The goal of this measure is painfully obvious: to wean government off of what is causing it to be oversized and bloated. The hope is that the shift in funding will consequently create a seismic shift in priorities for the enforcement of the law.

“The main objective of ‘Stop the Shakedowns’ is more judicious enforcement, based on the spirit of the law, rather than opportunistic enforcement that is more interested in revenue than justice,” adds Kerbel.

Restitution to victims will, of course, be the first priority but—as many who follow this issue know—often there is no victim involved.

The incentive to generate revenue through the enforcement of victimless crimes would be flipped on its head—all but removing the motivation for speed traps or other LEO activities that distract from actual criminal investigations and public safety.

This measure would also remove the more than apparent conflict of interest that arises from enforcing laws as a revenue stream. In a recent investigation, it was uncovered that many Colorado municipalities rely heavily upon ticketing, fines and penalties as a primary source of revenue. Mountain View, Colorado generated 53 percent of its budget from citations. The most commonly cited violations were (in order) seat belt violations, red light violations, and “obstructed view” (usually, cracked windshields). Criminalizing such victimless offenses while financially benefiting from the endeavor provides an unsettling perception that the law enforcement community is only self-interested and not concerned in maintaining public safety. Neutralizing this conflict of interest can only improve perceptions of law enforcement.

“It should be ‘serve and protect’, not ‘fine and collect,’” Kerbel asserts.

The Time is Right

Colorado is on the verge of being on the forefront of another hotbed political issue: civil asset forfeiture.

While Kerbel was toying with language for another proposal—one that would have put the abolition of civil asset forfeiture on the ballot—Colorado legislators were already in the midst of addressing that very same issue.

In April, House Bill 1313, titled simply “Civil Forfeiture Reform”, was introduced to the floor of the Colorado General Assembly. Far from abolishment, the bill requires that law enforcement agencies report asset seizures to the state government, which will, in turn, publish and maintain the information on a public database. HB-1313 merely brings more transparency to the process

Sponsored by a diverse collection of legislators, the bill was passed with a resounding majority. Of the 100 Colorado legislators, only 14 opposed the bill. HB-1313 was signed into law by Governor John Hickenlooper on June 9th.

“It’s a difficult process for them to work their way through in the first place,” laments Larimer County Sheriff Justin Smith, referring to prior asset seizure protocols. “I just simply see a lot of agencies—they will abandon forfeitures.”

This is an ironic choice of words by Sheriff Smith because that’s exactly the point. With added transparency, Colorado residents will have a better understanding of civil asset forfeiture, which amounted to $13.5 million worth of seizures in 2014 alone.

Though a moderate reform, this new law is being applauded nationally. “Colorado now has the best laws in the nation, hands-down, for seizure and forfeiture transparency,” said Institute for Justice Senior Legislative Counsel Lee McGrath. “Through its comprehensive disclosure requirements, this law will play a vital role in keeping both the public and the legislators well-informed about civil forfeiture in Colorado.”

Law enforcement rent-seeking is facing some significant challenges in Colorado, so Kerbel is tapping into something unique at a pivotal time. This may be a “right time, right place” scenario for 'Stop the Shakedowns'.

Call to Action

To move the needle, work needs to be done.

Kerbel is meticulous in his management of 'Stop the Shakedowns'. He is currently organizing an issues committee that will serve as the primary decision-making body of the campaign. With governance in place, the group can start accepting donations and directing volunteers. Kerbel is also working on recruiting partnering organizations who can bring added clout to his cause.

Getting the ballot measure finalized is another key step. Kerbel is working closely with Colorado’s Secretary of State to fine-tune ballot language. To do so, hearings with the SOS will need to be scheduled.

Once all of the legalese is completed, then comes the next obstacle: signature gathering. To get on the ballot, over 98,500 signatures of verified registered voters will need to be gathered. To be on the safe side, Kerbel is setting a goal of 150,000 signatures. Kerbel and team will have six months to complete this task. Once on the clock, volunteers will need to pound the pavement to push this forward.

“The signature part is the hard work,” Kerbel smirks. “Once on the ballot, I predict that this will be fun.”

Jay Stooksberry is a freelance writer with passions for liberty, skepticism, fatherhood, humor, and whiskey. His work has been published in Newsweek, Independent Voter Network, Fatherly, and other publications. When he's not writing, he splits his time between marketing consultation, outreach work for his local Libertarian Party affiliate, and enjoying his spare time with his wife and son. Follow him on Facebook and Twitter.

Thursday, June 22, 2017

If the federal government wants to compel an online service provider, like Yahoo or Google, to turn over your email, they need a warrant. That's the industry-accepted best practice, implemented by nearly every major service provider. More importantly, it's what the Fourth Amendment requires.

The Securities and Exchange Commission (SEC), the federal agency charged with enforcing federal securities laws, seems to think it falls outside the warrant requirement. In a civil case currently pending in Maryland, the agency asked a federal judge to compel Yahoo to comply with an administrative subpoena—read, not a warrant—it sent to the company, which would require the company to turn over the emails of one of its users. An administrative subpoena lacks the privacy safeguards of a warrant, including a higher standard justifying government access (i.e., probable cause) and prior review by a judge.

Yahoo fought back, refusing to comply with the subpoena and opposing the SEC's motion. Last week, EFF, joined by our friends at CDT, filed an amicus brief in support of Yahoo. Our brief made a simple point: if the federal government wants to compel a third-party provider to turn over a user's email, it needs a warrant. That rule applies to the SEC, just as any other federal or state government agency.

The SEC's position isn't a new one. They have long claimed a right to access email content from providers without a warrant. In fact, the SEC has been one of the primary obstacles to passing an update to the Electronic Communications Privacy Act (ECPA), the federal law that governs government access to emails and other content stored in the cloud. But this is the first time (as far as we know) that the SEC has tested its theory in court.

Fortunately, even though the SEC has so far been successful in blocking attempts to amend ECPA, the agency still has to contend with the Constitution. As we explained in our brief, because users have a reasonable expectation of privacy in their email stored with online service providers (a point SEC wisely conceded), the Fourth Amendment requires the agency to obtain a warrant—or to rely on an exception to the warrant requirement—in order to intrude upon that privacy.

The SEC argues that, as a civil law enforcement agency, it lacks the power to obtain a warrant by itself. But as we pointed out, whenever there is a criminal component to an investigation—as is the case here—the SEC can coordinate with the Justice Department to obtain a warrant. Apparently, the SEC is concerned that, in purely civil cases, when it can't work with the Justice Department to obtain a warrant, companies or individuals may be able to shield their emails from disclosure. But civil litigation offers a variety of levers for the SEC to pull in order to obtain the same or similar information, without compelling its disclosure from a third-party service provider.

Ultimately, our constitutional privacy rights shouldn't be diminished just because the SEC wants to conduct its investigations more efficiently. The hearing in the case is scheduled for Friday, June 30. We hope the court will send a clear message to government agencies: if you want to compel a third-party provider to turn over email content, get a warrant.

Why Experts Get the Gold Standard Wrong

Many mainstream economists, perhaps a majority of those who have an opinion, are opposed to tying a central bank’s hands with any explicit monetary rule. A clear majority oppose the gold standard, at least according to an often-cited survey. Why is that?

First some preliminaries. By a “gold standard” I mean a monetary system in which gold is the basic money. So many grains of gold define the unit of account (e.g. the dollar) and gold coins or bullion serve as the medium of redemption for paper currency and deposits.

By an “automatic” or “classical” gold standard I mean one in which there is no significant central-bank interference with the functioning of the market production and arbitrage mechanisms that equilibrate the stock of monetary gold with the demand to hold monetary gold.

The United States was part of an international classical gold standard between 1879 (the year that the dollar’s redeemability in gold finally resumed following its suspension during the Civil War) and 1914 (the First World War).

Serving the Status-Quo

Why isn’t the gold standard more popular with current-day economists? Milton Friedman once hypothesized that monetary economists are loath to criticize central banks because central banks are by far their largest employer. Providing some evidence for the hypothesis, I have elsewhere suggested that career incentives give monetary economists a status-quo bias. Most understandably focus their expertise on serving the current regime and disregard alternative regimes that would dispense with their services. They face negative payoffs to considering whether the current regime is the best monetary regime.

Here I want to propose an alternative hypothesis, which complements rather than replaces the employment-incentive hypothesis. I propose that many mainstream economists today instinctively oppose the idea of the self-regulating gold standard because they have been trained as social engineers. They consider the aim of scientific economics, as of engineering, to be prediction and control of phenomena (not just explanation).

They are experts, and an automatically self-governing gold standard does not make use of their expertise. They prefer a regime that values them. They avert their eyes from the possibility that they are trying to optimize a Ptolemaic system, and so prefer not to study its alternatives.

The actual track record of the classical gold standard is superior in major respects to that of the modern fiat-money alternative. Compared to fiat standards, classical gold standards kept inflation lower (indeed near zero), made the price level more predictable (deepening financial markets), involved lower gold-extraction costs (when we count the gold extracted to provide coins and bullion to private hedgers under fiat standards), and provided stronger fiscal discipline.

The classical gold standard regime in the US (1879-1914), despite a weak banking system, did no worse on cyclical stability, unemployment, or real growth.

Unnecessary Monetary Policy Tightening

The classical gold standard’s near-zero secular inflation rate was not an accident. It was the systemic result of the slow growth of the monetary gold stock. Hugh Rockoff (1984, p. 621) found that between 1839 and 1929 the annual gold mining output (averaged by decade) ran between 1.07 and 3.79 percent of the existing stock, with the one exception of the 1849-59 decade (6.39 percent growth under the impact of Californian and Australian discoveries).

Furthermore, an occasion of high demand for gold (for example a large country joining the international gold standard), by raising the purchasing power of gold, would stimulate gold production and thereby bring the purchasing power back to its flat trend over the longer term.

A recent example of a poorly grounded historical critique is provided by textbook authors Stephen Cecchetti and Kermit Schoenholtz. They imagine that the gold standard determined money growth and inflation in the US until 1933, and so they count against the gold standard the US inflation rate in excess of 20% during the First World War (specifically 1917), followed by deflation in excess of 10% a few years later (1921).

These rates were actually produced by the policies of the Federal Reserve System, which began operations in 1914. The classical gold standard had ended during the Great War, abandoned by all the European combatants, and did not constrain the Fed in these years.

Cecchetti and Schoenholtz are thus mistaken in condemning “the gold standard” for producing a highly volatile inflation rate. (They do find, but do not emphasize, that average inflation was much lower and real growth slightly higher under gold.) They also mistakenly blame “the gold standard” – not the Federal Reserve policies that prevailed, nor the regulatory restrictions responsible for the weak state of the US banking system – for the US banking panics of 1930, 1931, and 1933.

There are of course serious economic historians who have done valuable research on the performance of the classical gold standard and yet remain critics. Their main lines of criticism are two. First, they too lump the classical gold standard together with the very different interwar period and mistakenly attribute the chaos of the interwar period to the gold standard mechanisms that remained, rather than to central bank interference with those mechanisms.

In rebuttal Richard Timberlake has pertinently asked how, if it was the mechanisms of the gold standard (and not central banks’ attempts to manage them) that destabilized the world economy during the interwar period, those same mechanisms managed to maintain stability before the First World War (when central banks intervened less or, as in the United States, did not exist)?

Here, I suggest, a strong pre-commitment to expert guidance acts like a pair of blinders. Wearing those blinders, even if it is seen that the prewar system differed from and outperformed the interwar system, it cannot be seen that this was because the former was comparatively self-regulating and the latter was comparatively expert-guided.

Second, it is always possible to argue in defense of expert guidance that even the classical gold standard was second-best to an ideally managed fiat money where experts call the shots. Even if central bankers operated on the wrong theory during the 1920s, during the Great Depression, and under Bretton Woods, not to mention during the Great Inflation and the Great Recession, today they operate (or can be gotten to operate) on the right theory.

In the worldview of economics as social engineering, monetary policy-making by experts must almost by definition be better than a naturally evolved or self-regulating monetary system without top-down guidance. After all, the experts could always choose to mimic the self-regulating system in the unlikely event that it were the best of all options. (In the most recent issue of Gold Investor, Alan Greenspan claims that mimicking the gold standard actually was his policy as Fed chairman.) As experts they sincerely believe that “we can do better” by taking advantage of expert guidance. How can expert guidance do anything but help?

3 Ways to Fail

Expert-guided monetary policy can fail in at least three well-known ways to improve on a market-guided monetary system.

First, experts can persist in using erroneous models (consider the decades in which the Phillips Curve reigned) or lack the timely information they would need to improve outcomes. These were the reasons Milton Friedman cited to explain why the Fed’s use of discretion has amplified rather than dampened business cycles in practice.

Second, policy-makers can set experts to devising policies to meet goals that are not the public’s goals. This is James Buchanan’s case for placing constraints on monetary policy at the constitutional level.

Third, where the public understands that the central bank has no pre-commitments, chronically suboptimal outcomes can result even when the central bank has full information and the most benign intentions. This problem was famously emphasized by Finn E. Kydland and Edward C. Prescott (1977).

These lessons have not been fully absorbed. A central bank that announces its own inflation target (as the Fed has), and especially one that retains a “dual mandate” to respond to real variables like the unemployment rate or the estimated output gap, retains discretion.

It is free to change or abandon its inflation-rate target, with or without a new announcement. Retaining discretion – the option to change policy in this way – carries a cost.

The money-using public, uncertain about what the central bank experts will decide to do, will hedge more and invest less in capital formation than they would with a credibly committed regime. A commodity standard – especially without a central bank to undermine the redemption commitments of currency and deposit issuers – more completely removes policy uncertainty and with it overall uncertainty.

Blaming Gold for Failed Policy

Speculation about the pre-analytic outlook of monetary policy experts could be dismissed as mere armchair psychology if we had no textual evidence about their outlook. Consider then, a recent speech by Federal Reserve Vice Chairman Stanley Fischer.

At a May 5, 2017 conference at the Hoover Institution, Fischer addressed the contrast between “Committee Decisions and Monetary Policy Rules.” Fischer posed the question: Why should we have “monetary policy decisions … made by a committee rather than by a rule?” His reply: “The answer is that opinions – even on monetary policy – differ among experts.”

Consequently we “prefer committees in which decisions are made by discussion among the experts” who try to persuade one another. It is taken for granted that a consensus among experts is the best guide to monetary policy-making we can have.

Fischer continued:

Emphasis on a single rule as the basis for monetary policy implies that the truth has been found, despite the record over time of major shifts in monetary policy – from the gold standard, to the Bretton Woods fixed but changeable exchange rate rule, to Keynesian approaches, to monetary targeting, to the modern frameworks of inflation targeting and the dual mandate of the Fed, and more. We should not make our monetary policy decisions based on that assumption. Rather, we need our policymakers to be continually on the lookout for structural changes in the economy and for disturbances to the economy that come from hitherto unexpected sources.

In this passage Fischer suggested that historical shifts in monetary policy fashion warn us against adopting a non-discretionary regime because they indicate that no “true” regime has been found. But how so?

That governments during the First World War chose to abandon the gold standard (in order to print money to finance their war efforts), and that they subsequently failed to do what was necessary to return to a sustainable gold parity (devalue or deflate), does not imply that the mechanisms of the gold standard – rather than government policies that overrode them – must have failed.

Observed changes in regimes and policies do not imply that each new policy was an improvement over its predecessor – unless we take it for granted that all changes were all wise adaptations to exogenously changing circumstances. Unless, that is, we assume that the experts guiding monetary policies have never yet failed us.

Better, Because Science

Fischer further suggested that a monetary regime is not to be evaluated just by the economy’s performance, but by how policy is made: a regime is per se better the more it incorporates the latest scientific findings of experts about the current structure of the economy and the latest models of how policy can best respond to disturbances.

If we accept this as true, then we need not pay much if any attention to the gold standard’s actual performance record. But if instead we are going to judge regimes largely by their performance, then replacing the automatic gold standard by the Federal Reserve’s ever-increasing discretion cannot simply be presumed a good thing. We need to consult the evidence. And the evidence since 1914 suggests otherwise.

Contrary to Fischer, there is no good reason to presume that expert-guided monetary regimes get progressively better over time, because there is no filter for replacing mistaken experts with better experts. We have no test of the successful exercise of expertise in monetary policy (meaning, superiority at correctly diagnosing and treating exogenous monetary disturbances, while avoiding the introduction of money-supply disturbances) apart from ex post evaluation of performance.

The Fed’s performance does not show continuous improvement. As previously noted, it doesn’t even show improvement over the pre-Fed regime in the US.

A fair explanation for the Fed’s poor track record is Milton Friedman’s: the information necessary for successful expert guidance of monetary policy is simply not available in a timely fashion.

Those who recognize this point will be open to considering the merits of moving, to quote the title a highly pertinent article by Leland B. Yeager, “toward forecast-free monetary institutions.” Experts who firmly believe in expert guidance of monetary policy, of course, will not recognize the point. They will accordingly overlook the successful track record of the automatic gold standard (without central bank management) as a forecast-free monetary institution.

Saturday, June 17, 2017

Millions Died Thanks to the Mother of Environmentalism

On Jan. 24, 2017, PBS aired a two-hour special on Rachel Carson, the mother of the environmental movement. Although the program crossed the line from biography to hagiography, in Carson’s case, the unbridled praise was well deserved – with one exception.

Rachel Carson was an American hero. In the early 1960s, she was the first to warn that a pesticide called DDT could accumulate in the environment, the first to show that it could harm fish, birds, and other wildlife, the first to warn that its overuse would render it ineffective, and the first to predict that more natural means of pest control – like bacteria that killed mosquito larvae – should be used instead.

Unfortunately, the PBS documentary neglected to mention that in her groundbreaking book, Silent Spring, Carson had made one critical mistake – and it cost millions of people their lives.

Carson's Literary Acclaim

On Nov. 1, 1941, Rachel Carson published her first book, Under the Sea-Wind. Although written for adults, the book had a child-like sense of wonder. Under the Sea-Wind told the story of Silverbar, a sanderling that migrated from the Arctic Circle to Argentina; Scomber, a mackerel that traveled from New England to the Continental Shelf; and Anguilla, an American eel that journeyed to the Sargasso Sea to spawn. “There is poetry here,” wrote one reviewer.

On July 2, 1951, Carson published her second book, The Sea Around Us. Two months later, The Sea Around Us was #1 on the New York Times bestseller list, where it remained for 39 weeks: a record. When the dust settled, The Sea Around Us had sold more than 1.3 million copies, been translated into 32 languages, won the National Book Award, and been made into a movie. Editors of the country’s leading newspapers voted Rachel Carson “Woman of the Year.”

In October 1955, Carson published her third book, The Edge of the Sea, a tour guide for the casual adventurer. The New Yorker serialized it, critics praised it and the public loved it: more than 70,000 copies were sold as it rocketed to #4 on the New York Times bestseller list.

Today, most people under the age of 40 have probably never heard of Rachel Carson. But in the early 1960s, almost every American knew her name.

Demonizing DDT

On Sept. 27, 1962, Rachel Carson changed her tone. Her next book, Silent Spring, which she called her “poison book,” was an angry, no-holds-barred polemic against pesticides: especially DDT.

The first chapter of Silent Spring, titled “A Fable for Tomorrow,” was almost biblical, appealing to our sense that we had sinned against our Creator. “There was once a town in the heart of America where all life seemed to live in harmony with its surroundings. Then a strange blight crept over the area and everything began to change… the cattle and sheep sickened and died… streams were lifeless… everywhere there was the shadow of death.”

Birds, especially, had fallen victim to this strange evil. In a town that had once “throbbed with scores of bird voices there was now no sound, only silence.” A silent spring. Birds weren’t alone in their suffering. According to Carson, children suffered sudden death, aplastic anemia, birth defects, liver disease, chromosomal abnormalities, and leukemia – all caused by DDT. And women suffered infertility and uterine cancer.

Carson made it clear that she wasn’t talking about something that might happen – she was talking about something that had happened. Our war against nature had become a war against ourselves.

In May 1963, Rachel Carson appeared before the Department of Commerce and asked for a “Pesticide Commission” to regulate the untethered use of DDT. Ten years later, Carson’s “Pesticide Commission” became the Environmental Protection Agency, which immediately banned DDT. Following America’s lead, support for international use of DDT quickly dried up.

The Global Killer

Although DDT soon became synonymous with poison, the pesticide was an effective weapon in the fight against an infection that has killed – and continues to kill – more people than any other: malaria.

By 1960, due largely to DDT, malaria had been eliminated from eleven countries, including the United States. As malaria rates went down, life expectancies went up; as did crop production, land values, and relative wealth.

Probably no country benefited from DDT more than Nepal, where spraying began in 1960. At the time, more than two million Nepalese, mostly children, suffered from malaria. By 1968, the number was reduced to 2,500; and life expectancy increased from 28 to 42 years.

After DDT was banned, malaria reemerged across the globe:

In India, between 1952 and 1962, DDT caused a decrease in annual malaria cases from 100 million to 60,000. By the late 1970s, no longer able to use DDT, the number of cases increased to 6 million.

In Sri Lanka, before the use of DDT, 2.8 million people suffered from malaria. When the spraying stopped, only 17 people suffered from the disease. Then, no longer able to use DDT, Sri Lanka suffered a massive malaria epidemic: 1.5 million people were infected by the parasite.

In South Africa, after DDT became unavailable, the number of malaria cases increased from 8,500 to 42,000 and malaria deaths from 22 to 320.

Since the mid 1970s, when DDT was eliminated from global eradication efforts, tens of millions of people have died from malaria unnecessarily: most have been children less than five years old. While it was reasonable to have banned DDT for agricultural use, it was unreasonable to have eliminated it from public health use.

Costing Lives

Environmentalists have argued that when it came to DDT, it was pick your poison. If DDT was banned, more people would die from malaria. But if DDT wasn’t banned, people would suffer and die from a variety of other diseases, not the least of which was cancer. However, studies in Europe, Canada, and the United States have since shown that DDT didn’t cause the human diseases Carson had claimed.

Indeed, the only type of cancer that had increased in the United States during the DDT era was lung cancer, which was caused by cigarette smoking. DDT was arguably one of the safer insect repellents ever invented – far safer than many of the pesticides that have taken its place.

Carson’s supporters argued that, had she lived longer, she would never have promoted a ban on DDT for the control of malaria. Indeed, in Silent Spring, Carson wrote, “It is not my contention that chemical pesticides never be used.” But it was her contention that DDT caused leukemia, liver disease, birth defects, premature births, and a whole range of chronic illnesses.

An influential author can’t, on the one hand, claim that DDT causes leukemia (which, in 1962, was a death sentence) and then, on the other hand, expect that anything less than that a total ban of the chemical would result.

In 2006, the World Health Organization reinstated DDT as part of its effort to eradicate malaria. But not before millions of people had died needlessly from the disease.